Relational Contracts and the Theory of the Firm
George P. Baker
HBS Negotiations, Organizations and Markets Unit; National Bureau of Economic Research (NBER)
Robert S. Gibbons
Massachusetts Institute of Technology - Sloan School and Department of Economics; National Bureau of Economic Research (NBER)
Kevin J. Murphy
University of Southern California - Marshall School of Business; University of Southern California - Department of Economics; USC Gould School of Law
December 29, 1997
We combine Simon's conception of relational contracts with Grossman and Hart's focus on asset ownership. We analyze whether transactions should occur under vertical integration or non-integration, and with or without self-enforcing relational contracts. These four models allow us to re-run the horse race Coase proposed between markets and firms as alternative governance structures, but with four horses rather than two. We find that efficient ownership patterns are determined in part by the relational contracts that ownership facilitates, that vertical integration is an efficient response to widely varying supply prices, and that high-powered incentives create bigger reneging temptations under integration than under non-integration.
Note: this paper was formerly titled "Implicit Contracts and the Theory of the Firm"
Number of Pages in PDF File: 41
JEL Classification: D21, D23, D81, D82working papers series
Date posted: May 11, 1997
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